“Blue-Pencil” Doctrine of Non-Compete Provisions in Labor Contracts

The Indiana Court of Appeals recently revisited the “blue-pencil” doctrine in Clark’s Sales and Services, Inc., vs. John D. Smith and Ferguson Enterprises, Inc., 4 N.E.3d 772 (Ind. Ct. App. 2014), which concerned an employment agreement containing a restrictive covenant/noncompetition provision. Based on the employee’s (“Smith”) fourteen-year career with the former employer and Smith’s access to confidential information, the court found a protectable interest before moving onto the reasonableness of such restrictions.

The court found these particular clauses were unreasonable in both the scope of activities covered and geographic area. The clauses prohibited Smith from “providing services competitive to those offered by [employer], or those provided by Smith on behalf of [employer] to anyone who was a customer of [employer] during the term of Smith’s employment.” This clause was unreasonable because it applied to all customers regardless of whether Smith had any contact with them; applied to Smith’s entire term of employment with the employer; and the prohibited activities were unrelated to what Smith actually performed.
The employment agreement also contained a geographical restriction which restricted Smith from working within a geographic area that included any state H.H. Gregg does business, Marion County, contiguous counties to Marion County, any county in Indiana where the employer has at least one customer, the State of Indiana, or within a fifty-mile radius of employer’s office. The court found this restriction unreasonable because it considered the fifty-mile radius restriction an addition to, and “not a limitation of, the much more expansive geographic restrictions of this provision . . . .”

Blue-Pencil Doctrine
Under the blue-pencil doctrine, a court will enforce reasonable restrictions or covenants but strike unreasonable ones if they are clearly divisible or separated into parts. This does not allow courts to add terms not in the original agreement.

In this case, the employer proposed the following “blue-pencil” revisions:

“Solicit or provide, or offer to solicit or provide, services competitive to those offered by Employer, or those provided by Employee on behalf of Employer, to any business account or customer of Employer who serviced or contacted by Employee, or for whom Employee had direct or indirect responsibility, on behalf of Employer within the 12-month period preceding the termination [of] Employee’s employment or about whom Employee obtained Confidential Information.”

The court held that the blue-pencil doctrine was inapplicable because this provision was not “divisible” nor “clearly separated into parts” nor written to include “severable terms.” “There is no clear separation of terms or clauses that were or could be intended to be excised from the whole without changing the entire meaning and import of the passage.” Also, even if this passage was removed, the court stated it would not solve the unreasonableness of the scope of activities prohibition which would require further redacting. Therefore, to properly use the blue-pencil doctrine and redact unreasonable clauses, those clauses must be divisible, clearly separated into parts, and written to include severable terms. This would greatly increase an employer’s enforcement options in court.

Jeremy Fetty is a partner in the law firm of Parr Richey Frandsen Patterson Kruse with offices in Lebanon and Indianapolis. He often advises businesses and utilities (for profit, non-profit and cooperative) on organizational, human resources, and transactional matters and drafts and reviews commercial contracts.

The statements contained herein are matters of opinion and general information only and are not to be considered legal advice and should not be construed to form an attorney-client relationship. If you have any questions regarding this article, please contact an attorney.

Partner Highlights

JAMES A.L. BUDDENBAUM is a partner with the Indianapolis office of Parr Richey Frandsen Patterson Kruse LLP, where he concentrates in corporate law, acquisitions, business transactions, utility, real estate, employment, and complex insurance, and other business litigation. more ›

KENT FRANDSEN has practiced with the firm since 1977, concentrating in civil litigation, zoning and land use, electric utility, estate planning and estate administration, and education law. more ›

PAUL KRUSE graduated cum laude from Indiana University School of Law at Indianapolis in 1981 and has been a partner in the firm since 1984. more ›

MIKE SCHULTZ concentrates his practice on civil litigation. He routinely handles a wide variety of employment related disputes, representing both business and employees, and is a frequent lecturer on compliance with federal employment laws. more ›